Summary

NQ's foray into insurance bundling could be a big addition to the bottom line.

Bison Capital offer appears to be an attempt to acquire NQ for a shockingly cheap price.

NQ Mobile (NYSE:NQ) is one of the most difficult companies to fairly analyze, with difficulties in obtaining anything close to up-to-date financial data, and hysterical claims that the company is a fraud complicating any analysis of valuation.

Still, any value investor can't help but see NQ Mobile at the top of a lot of screens. While the numbers may not all be entirely reliable, that does not mean they cannot be useful in evaluating the company's worth, so long as one leaves open room for downward revisions.

The muddy elephant in the roomLooming over NQ Mobile's valuation are claims from Muddy Waters that the company is a "zero," and a fraud of almost preposterous levels.

Early aspects of this allegation were quickly refuted, particularly the claims that the company's cash on hand figures were fictitious. The difficulty with getting the financial data audited means we don't have new, audited figures from anything beyond FY2012.

Even if it isn't possible to 100% refute claims of fraud from the standpoint of an individual investor, there are some fairly trivial steps we can take to confirm that, yes, NQ Mobile is very much a real thing.

The first obvious stop is Google Play, which can quickly affirm that NQ Mobile's software is widely downloaded. Multiple products are in the (admittedly broad) 10 million to 50 million downloads range, and this of course doesn't include factory installs, or installations through other Android marketplaces. These figures make the overseas (read: non-China) portion of the install base, 119.4 million as of FY2012, entirely plausible. A trip to a cellphone store can quickly confirm that NQ products are, if not ubiquitous, relatively common as a factory installed option.

The Chinese install base can't be as directly confirmed for a Western investor, but there isn't any specific evidence that any of it is fictitious either. 700,000 seats at China's National Bureau of Statistics would be awfully easy for Muddy Waters to disprove, if it was truly false, but mysteriously the speculation of fraud hasn't come with any specific evidence backing it up.

Occam's Razor cuts both waysFor the complete fraud allegations to be true, the number of people who would have to be involved in the cover-up would be truly staggering. Google would have to be falsifying download data. Partner companies like Sprint and Ubisoft would have to be in on it. Major Chinese government programs would have to be involved in the fiction. Most importantly Bison Capital Holding, which offered to buy the company out a few weeks ago, would've had to tender a bogus offer for a fake company for literally no plausible reason.

Looking for the simplest explanation cuts both ways, and while a global conspiracy to forward a fictitious company to bilk investors out of a few hundred million dollars isn't particularly plausible, neither is the idea that the books are entirely in order, and PricewaterhouseCoopers was holding up the audit just to be mean.

Let's assume that growth is more or less real, and the company has been more or less doubling its revenue every year since 2008. Would it not be entirely plausible, and in fact likely, that any company going through that sort of rapid growth would be struggling to keep up with its bookkeeping?

The hysterical reaction surrounding every piece of news coming out of the company lately is baffling. Earlier this week, CFO KB Teo resigned, citing family reasons. The stock cratered briefly, but rebounded almost as quickly when it became clear this wasn't about the audit. The same thing happened when the audit committee head resigned over personal problems, and in reverse around the Bison Capital bid, when the stock jumped briefly, then Muddy Waters claimed they didn't think the bid was even a real thing, and it came back down.

The stock seems not to be reacting at all to the business itself anymore, and is being driven entirely by panic selling and buying based on the headline of the day. That's often a great place to find value, if one is willing to wait for the market to come to its senses.

Instead of imagining a conspiracy either to defraud investors or to benefit shorts, I would argue that the most reasonable explanation is that NQ Mobile is a company with a fairly complicated set of revenue streams that hasn't been able to keep its accounting division up with the growth of interest in smartphone security applications.

NQ Mobile: By the numbersIf we are willing to invest on the likely belief that NQ Mobile's books are simply a mess and not a massive fraud, it becomes easier to figure out what the company is potentially worth. We can trust general trends, if not specifics.

There are 136 million shares outstanding, which is to say 27.2 million American depositary shares. FY2012 earnings were $9.4 million, FY2013 earnings, unaudited and non-GAAP , were $58.3 million (according to NQ's conference call). If true, that would be a PE ratio of 3.12.

Total shareholder equity far outstrips the company's market capitalization, and advertising revenues, likely the most reliable income source, have been soaring, $16.7 million in just Q4 of FY2013. The early efforts to add insurance bundling to their security packages could be a major boost down the road.

NQ Live, their wallpaper replacement, is also seeing rapid adoption by users, with 8 million monthly active users reported at the end of FY2013, and guidance of 60 million by the end of FY2014. Their audio search program Music Radar has some 20 million downloads, and their gaming subsidiary FL Mobile is enjoying a $60 million run rate.

The best news, especially for people suspicious of the numbers out of China, is that NQ Mobile has shown a growing ability to attract paying customers in the overseas market as well.

With smartphones growing ever-more popular, and the recent NSA surveillance scandals fueling even more concern about security on mobile devices, NQ seems incredibly well positioned to keep growing those numbers at home and abroad.

Even if we assume substantial fuzziness in the data, it becomes much easier to understand why Bison Capital is floating the idea of acquiring the company at $9.80 per ADS. They're in a much better position than an individual investor to gauge just how fuzzy this data is, and could be getting a ridiculously good value.

ConclusionObviously, any recovery in NQ share prices is dependent almost entirely on Marcum Bernstein Pinchuk LLP, the new auditor, getting this company's books in order. Even a significant downward restatement would ultimately be good news, as we'd finally know exactly what we're dealing with.

Current prices assume a restatement far worse than anything that seems remotely plausible if we assume the problems are with precision and not a matter of company-wide deception. If this pans out, it could wind up the value story of the decade.

That said, an investor should always recognize the possibility he is making a mistake, and when we're dealing with a company with as much uncertainty as NQ Mobile, it would be reckless to jump in too heavily.

The numbers, fuzzy though they may be, suggest an impressive deep value play, and for someone willing to wait out the seemingly interminable audit process, it's hard to argue NQ isn't worth dipping into a little bit. There aren't a lot of ways to directly invest in the mobile security application market, and NQ Mobile is both a solid, growing player in this sector, and a cheap one.

Disclosure:The author is long NQ.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.